With the Durbin Amendment, Operation Choke Point, the DOJ’s antitrust suit against Mastercard and Visa, and the Fed cheering faster payments, the conversation surrounding U.S. regulators have been louder than ever. Though U.S. regulators have had some impact, they’ve also remained to be relatively restrained. Alternatively, the EU has been more willing to intervene. Herein lies our debate: which is optimal—a free market or a market that’s guided by regulators?
In this recap of a recent Money 20/20 debate (featuring two prominent voices in the industry, each on opposing sides, Rene Pelegero of RPGC Group and Eric Grover of Intrepid Ventures), that question is met with passionate, poignant answers on each end of the spectrum.
Or, in other words, was Durbin a good thing? Our debaters chose (of course) very different sides. For Rene Pelegero, the answer is simple—unregulated markets work well until they don’t. He believes it’s necessary for regulators to come back into the market when needed to bring balance that cannot exist otherwise. To Pelegero, our payment system is, undoubtedly, broken, antiquated, and behind-the-times. Despite having the highest interchange rates in the world, we still struggle in the face of innovation, using technologies and strategies that are dated, ultimately holding us back. He believes Durbin brought some innovations into play by calling out those inefficiencies. If it was a good thing for the debit card marketplace, he reasons, why not credit?
As far as Eric Grover, he couldn’t be further from Pelegero’s assessment. “I disagree,” he countered immediately. Not only does he believe that the Durbin Amendment caused enormous harm, but he also believes that price control is harmful, always. In his eyes, price controls cause shortages and capital misallocation, and, in his opinion, regulators often object to asymmetric pricing.
In the industry, we can all agree that we want real-time payments to happen, but from where should the initiative come? To Pelegero, the answer again, is simple—from the government. “Yes, the government needs to be involved,” he said, “and this has been proven everywhere around the world.” He cited examples from Australia and Europe, expressing the difference in the framework they’ve created that helps to define different roles. For Pelegero, it’s not as simple as saying “we don’t want the feds to compete”—instead, as we move forward, the Fed needs to get involved in terms of creating a framework already available in other countries. In essence, that begs a different question—should they be involved in creating alternative solutions? He says yes.
But Eric Grover disagrees. He believes involvement from the government to enforce real-time payments is a mistake. “A competitive U.S. payment market is developing,” he said, “the Fed should not compete.” He goes on to explain that even if this wasn’t a huge conflict of interest, there’s no reason the government should compete with the private sector—not only does it have huge institutional advantages, but it wouldn’t meet with any formidable competitors as they’re not able to invest as heavily in order to compete at all. All in all, Grover believes government involvement in these efforts would be a huge mistake.
For Pelegero, he’s absolutely sure that mimicking the customer authentication models from the EU is necessary. That practice has created a strong level of innovation in the EU marketplace—something he firmly believes is missing from the U.S. marketplace. Further, it’s more competitive this way, allowing more innovative ideas to continue to flood the market. As for Grover, he’s not convinced. “Brussels is the North Star for those who want more payment regulations,” he explained, “and emulating Brussels’ approach would be a huge mistake.” This mandate increases payment friction, unnecessarily burdens customers, and ultimately, discourages eCommerce. For Grover, it’s vital that regulators should let those bearing the risk to determine appropriate risk management and trade-offs.
It’s unsurprising, at this point, that Pelegero believes there’s nothing wrong with private consortia setting up standards—in fact, he says, currently, we use standards that were developed by private consortia. The issues come into play when those standards are used in a way that prevents companies from introducing new products and services—if every issue specification becomes a de facto standard, that prevents new products from actually being listed in our marketplace.
Grover, however, believes that the government has a monopoly for setting standards—take that away from them, and you’ll see the fur fly. Currency competition from private places would, in essence, be a good thing, but the government is fighting to protect that.
Still an Open Debate
Bruce Parker, CEO of Modo, who was moderating the debate left it up to the audience to decide the winner. Rene Pelegero of RPGC Group, who believes a regulated environment is an innovative one, won the day. That being said, the fate of the conversation of the U.S. regulators is, currently, still anyone’s guess. The question still remains—which is more prudent, a free market or a regulated one?